Since Dec. 21, 2013, all eyes have been on Mexico. That was the day the Diario Oficial de la Federación announced a constitutional amendment ending 75 years of Petróleos Mexicanos’s (Pemex’s) state monopoly on oil and gas in the country. Since then numerous conferences and meetings have been held to discuss what this means for the world at large, examining the minutiae of details as Mexico moves into the early stages of opening its reserves to foreign investors.

But in the macro view, “This is a great achievement,” said Duncan Wood, director of the Mexico Institute at the Woodrow Wilson International Center for Scholars, during a Mayer Brown conference. “We should not diminish the impact of what has happened here.”

What has happened is significant indeed – Mexico is moving from being one of the world’s most closed markets to a much more open system. This has been accomplished by the reform of three constitutional articles. Article 25 introduces the concept of “Productive Enterprises of the State,” according to information from the Comisión Nacional de Hidrocarburos (CNH). Article 27 provides entitlements of E&P by means of productive enterprises of the state and by private companies. Article 28 creates the Mexican Fund of Petroleum for stabilization and development through payments and the management of government cash flows.

Few argue against the need for the reforms despite considerable opposition within the country. Declining production and limited opportunity for growth have hobbled Pemex’s ability to adequately produce the country’s vast reserves. In fact, of all of the rigs currently being operated in the Gulf of Mexico (GoM), only 5% are working for Pemex, according to Marcial Nava at BBVA Research USA.

Additionally, many of the resources lie in shale formations or in deep water, plays that require deep pockets and vast technical know-how.

Finally, the closed nature of the market has hindered Pemex’s ability to exploit the country’s reserves, said Jesus Reyes Heroles, a former Pemex CEO, at the Mayer Brown event. “You have a national oil company that is not allowed to partner with other companies to pursue its opportunities,” Heroles said. “It has limited in a dramatic way Pemex’s capacity to comply with its objectives. It gradually made Pemex lose a lot of opportunities and to lag behind other oil companies in terms of know-how and technology.”

Next steps

What will happen next is a bit murkier. But according to the CNH, here is what is being planned:
• Within 90 days of the constitutional reform, Pemex will submit to Secretaria de Energia de Mexico (SENER) its selections for “Round Zero,” in which the company selects the fields it would like to continue to operate;
• Within 120 days, the Mexican congress will determine secondary laws to uphold the new reforms;
• Within 180 days, CNH and SENER will resolve Pemex’s Round Zero proposals; and
• After that, Round 1+n will be launched, in which foreign investors will be able to bid on Mexican licenses.

Foreign opportunities

Any company interested in investing in Mexico’s oil and gas will need to ask the obvious question – what is the prospectivity? Alfredo E. Guzman, president of Compañia Petrolera Altamira, gave a talk at the American Association of Petroleum Geologists International Conference and Exhibition in Cartagena, Colombia, in 2013. In his talk he outlined Mexico’s riches.

The country, Guzman said, has five major producing provinces. The Southeast and Tampico provinces are prospective for oil, and the Sabinas, Burgos, and Veracruz basins are prospective for gas. Other provinces also have potential, including the deepwater GoM.

“Despite this natural rich endowment, Mexico is the only country in the world among those considered to be oil-rich that has consistently lost production and reserves in the last 10 years,” Guzman said.

Opportunities for foreign companies are numerous, as spelled out in “Mexico Rising: Energy Reform at Last?” published by Atlantic Council. Chief among these are joint venture opportunities with Pemex. “Pemex will be able to bolster its income flow by keeping those projects that are most lucrative while spreading risk (and hence capital requirements) to areas where it lacks comparative advantage,” the report stated.

Perhaps the lowest hanging fruit can be found in mature fields. The report noted that Pemex’s “desperation” to minimize production declines resulted in fields that have only partially been developed. “It has not invested in readily available techniques to enhance recovery,” the report stated. “These mature fields – the ‘bitten apples’ that Pemex identifies – provide the most likely investment opportunities for midsize international companies and the most likely source of production increases in the near future.”

Mexico’s deep waters also should provide opportunities for foreign investment. Pemex already has had success there, with recent discoveries on the Mexican side of the Perdido basin, and it announced its fifth deepwater success in late January 2014. According to BBVA Research, companies with established operations in the deepwater US GoM should be able to take advantage of the 1+n and later licensing rounds to gobble up deepwater acreage.

“Large US and foreign multinational companies with economies of scale and the technological expertise have the biggest competitive advantages in deep and ultra-deep drilling,” a report from the research firm stated. “For example, Shell recently announced plans for a 9,500-ft [2,895-m] ultra-deep well in the Gulf. Exxon, BP, Chevron, Hess, and Anadarko are also going to be immediate contenders.”

Added Gabino Castillo, region manager, Americas, with CGG, “Deep offshore should be the priority for opening as we understand that the government is looking for technology and finances from private companies to explore and develop these resources.”

Geophysical contractors stand to benefit from these reforms. Atlantic Council noted that the lack of development in deep water provides opportunity for seismic surveys to help assess the resource potential. “A second near-term opening for international companies in Mexican oil and natural gas will be producing seismic studies for the government,” the report noted. “The government will require a high quality and massive amount of survey material in addition to Pemex’s largely two-dimensional inventory to market new acreage effectively.”

Companies like CGG are already in Mexico. CGG has primarily been offering marine services since 2005, including seismic processing and reservoir characterization. Castillo said that Pemex scientists recognize the value of the information provided by seismic data and well data. But more data will be needed to assess the deepwater potential.

“CGG has developed a leading multiclient library on the US side of the GoM,” said Luc Schlumberger, executive vice president of multiclient and new ventures for CGG. “We have designed our projects to meet the geological, technical, and operational challenges of this basin, which naturally extends into Mexico. As an example, we are currently engaged in the acquisition of a new generation of wide-azimuth surveys tailored to provide our customers with the best seismic images under the complex salt structures. We would be delighted to bring this experience into Mexico and develop a multiclient library there as soon as the regulatory framework is in place.”

And then there’s shale. Geology has a funny way of not respecting international boundaries, and the Eagle Ford shale is no exception. The play extends south of the Rio Grande, offering mouth-watering opportunities to shale players active north of the border.

“Underexplored” doesn’t begin to describe Mexico’s shale assets. Ranked sixth in the world for shale gas and eighth for shale oil, the country authorized the drilling of three shale wells in 2012. That same year, 9,100 wells were authorized in the US, according to BBVA.

BBVA reported that the Burgos basin, which houses Mexico’s side of the Eagle Ford, is estimated to hold 9.7 Tcm (343 Tcf) of technically recoverable reserves. However, it noted that geologic complexities might make the play more challenging to the south.

Opening the Mexican border to oil and gas commerce has interesting ramifications. Simply replicating some of South Texas’s success in Mexico could have an enormous impact on that country. Texas Railroad Commissioner David Porter told the Pleasanton Express that while Mexico’s production had declined by about 1 MMb/d, Texas’s production has almost doubled.

“I think it will be very beneficial for Mexico to start producing some of the shales and getting a lot more companies active and involved with our horizontal drilling technology,” he said.

Added David B. Leaverton, public affairs supervisor for Pioneer Natural Resources, “We believe these reforms will bring great economic benefits to the people of Mexico as well as lead to greater energy security for North America as a whole. While full implementation of these reforms will take time, Pioneer will continue to assess any future opportunities in Mexico that might arise as a result of this significant development.”

Opening up Mexico’s Eagle Ford shale to development could have a significant impact on the economic situation in the region, one of the poorest in North America. “Faster economic growth in the border will narrow the socioeconomic disparities between Texas border cities and big metro areas like Houston, Dallas, or Austin,” reported BBVA. “If these border towns effectively seize the opportunity, the US-Mexican border could see one of the most dramatic transformations in history. The upside for Mexican border towns could be even greater if economic prosperity allows them to eradicate the bad reputation created by drug trafficking and other illegal activities.”

Remaining challenges

With all of the hype surrounding the new energy reforms, it’s important to note that there is plenty of opportunity for things to go wrong. Atlantic Council lists seven challenges that could impede or even derail progress:
• Managing expectations;
• Delivering competitive exploration terms;
• Building effective regulators;
• Clarifying the value proposition for the power sector;
• Cutting the cord with Pemex;
• Trusting the market; and
• Managing local content requirements.

“Change of this scale is courageous, but implementation will be hard,” the report noted. “Although Mexico has a long history of energy development, it will be creating entirely new regulatory regimes for oil, gas, power, and energy transportation. Attracting private investment will require Mexico to execute on these reform plans with a speed and efficacy that would challenge any nation.”

Employment impact of Mexico’s energy reforms remains a mystery

By Bruce Peterson, Korn Ferry

The major reforms regarding privatization of Mexico’s oil and gas industry are exciting news to international companies looking to invest in this lucrative market. As one of the world’s top producers of hydrocarbons, coupled with its central location in the Eagle Ford shale play, Mexico has tremendous onshore and offshore resources that have gone untapped for more than 75 years. This historic legislation is destined to benefit Mexico and the worldwide oil and gas industry in terms of employment opportunities. But these benefits will not surface as soon as one might think.

Currently, energy talent and employment in Mexico are focused on the upstream sector, primarily because Petróleos Mexicanos (Pemex) has been the country’s sole employer for this market since 1927. Oilfield service companies such as Schlumberger, Halliburton, and Baker Hughes have been in Mexico for years, working with Pemex from the drilling and completion sides of the business. Since these companies already have infrastructure in place, it is natural to assume that once the reforms’ details are made clear and approved by the Mexican Congress, upstream expansion via international investments (and ultimately jobs) will immediately follow.

In truth, the extent of international investments and job growth will be unknown for quite a while. A lot of technology and infrastructure pertaining to the E&P sector must be reviewed and processed. For example, Mexico has not built its deepwater infrastructure off the Shelf like the US has into the Gulf of Mexico. This must be examined before companies can be retained to construct new offshore wells. It may take several years to collect relevant seismic data and drill enough test wells before major production can begin.

Furthermore, the current reforms will require partial use of local content – goods and services within Mexico – to further develop the upstream sector. The legislation currently being negotiated will outline the required percentage split between local content and out-of-country resources. Once these details are known, it will take the global upstream market two to three years to fully understand the new regulatory environment and obtain legal opinions on whether or not investment makes sense.

As a result, it is difficult to predict the exact types of talent needs and number of job opportunities for the upstream market that will arise from these reforms. It is safe to predict that there will initially be a high premium on technical skills followed by an emphasis on engineering and construction skills and ultimately on operational skills. Since the US talent pool is currently at capacity within the upstream sector, it also is safe to assume that the resulting talent requirements to service the expansion in Mexico will come from an international pool that includes enticing candidates from the US as well as countries such as Australia, Canada, the UK, and others.

Employment impact is a bit more optimistic, though, for the midstream and power generation sectors. The reforms will enable Mexico to shift from coal to a gas-fired power generation strategy, thus requiring construction of many new, smaller-sized gas-powered natural gas plants. Comisión Federal de Electricidad (CFE), the government-owned electrical utility, lacks the pipeline infrastructure to support such a shift, so additional talent to build this infrastructure will be required.

Mexico already has a fairly solid regulatory environment in place for midstream power generation. This presents opportunities for pipe manufacturing and construction companies to immediately come into Mexico to support this build-out once the legislation passes. Expect to see a rise in talent needs in any area touched by complete build-outs of pipeline infrastructure and gas treating facilities.

In the end, the reforms will result in a talent market consisting of Mexican citizens and outside professionals – both from the upstream and midstream sectors. Extensive training and development will be essential for Mexican citizens to be successful in exploring for and producing oil and gas and operating the new infrastructure. It will require forming strategic partnerships with international companies to gain the knowledge and skillsets necessary for Mexico to realize its energy goals.

Oil rush risks: security concerns in northern Mexico

Zoe Wakefield, Salamanca Group

Despite the significant domestic opposition to the prospect of foreign investment in Mexico’s energy sector, President Enrique Peña Nieto’s proposed constitutional reforms were approved by Congress and a majority of Mexican states in late 2013. As the legislation is drafted, foreign oil and gas companies will be lining up to gain access to the country’s vast proven reserves and promising unexplored territories. However, despite the potentially attractive investment environment, the security situation in northern Mexico is likely to prove a significant concern for future investors. In the short to medium term, Peña Nieto’s proposed holistic approach to security issues is unlikely to reduce the levels of risk in the region.

Due to the location of key drug cultivation and trafficking routes, the northern states of Sinaloa, Durango, and Chihuahua – the “Golden Triangle” – along with Sonora, Coahuila, Nuevo León, and Tamaulipas continue to see high levels of drug-related violence and cartel presence. Even though the operations, assets, and personnel of large corporations have thus far not become a deliberate target for the cartels, companies that are considering operating in the area should be aware of the significant security risks caused by high levels of crime. Criminal activity in the region involves gun violence, bombings, kidnapping, human trafficking, extortion, vehicle and cargo hijacking, and money laundering in a climate made more hazardous by entrenched police corruption and the emergence of armed self-defense groups. As the drug cartels have been forced to broaden their range of enterprise due to former president Felipe Calderón’s “War on Drugs” strategy, energy infrastructure and related businesses have been exposed as vulnerable to theft, extortion, and the kidnapping of Mexican employees (foreign nationals tend to not be targets of kidnappers).

For example, if the hydraulic fracturing boom is going to be extended to Mexico from Texas to exploit the half of the Eagle Ford shale field that lies in the Burgos basin in the states of Tamaulipas, Nuevo León, and Coahuila, operators will be pitching themselves into the middle of inter-cartel conflict between Los Zetas and factions of the Gulf Cartel. Pemex has been historically handicapped in the Burgos basin as a result of drug-related violence.

It also is important to note the moderate risk of civil unrest in the northern regions of Mexico. The reforms to the energy sector itself are a key subject of passionate national protest along with other structural reforms. Industrial action over wages is also a common occurrence, and Mexican unions tend to be very militant. Protestors regularly block transport access to major highways, regional cities, and border crossings.

As such, it is crucial that while some of the regulatory barriers may be lowered in the short term to operating in northern Mexico, companies should recognize that significant security challenges remain. Early recognition and appreciation of the security environment should be built into any new Mexico engagement strategy alongside the broader commercial and legal considerations highlighted by the energy reforms. In this regard, intelligence-driven security solutions involving ongoing monitoring of local political, security, and transnational dynamics and sophisticated community relations building will continue to be an invaluable consideration for future investors as they seek to become part of Peña Nieto’s energy revolution.

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